When we started writing for Perspective just about a year ago, we warned that the nation’s economy was undergoing a huge transition. Twelve months later, it’s becoming clear just how fundamental this shift in the economy is going to be.

You might say that the Great Recession has been followed by the Great Reset.

In this Great Reset, we will see a vastly altered relationship between housing, jobs and savings. In the pre- recession economy, housing ruled the day. Home construction, home finance and real estate brokerage made up a huge swath of economic activity. And homes were the primary savings vehicle for millions of families.

Today, we have entered a world where housing is an expense, not an investment. No longer can we buy a home expecting it to appreciate 5 percent a year, and count on that increase in home equity to fund our business start-up, kids’ college, that trip to Paris and, oh yes, our retirement.

Nearly 2 million jobs in home construction and another 691,000 in home financing are gone — with little prospect of them coming back. A parallel situation exists in commercial real estate, where the drop in values could approach 50 percent, and new construction has slowed greatly.

The meltdown in construction, where unemployment is in the neighborhood of 25 percent, figures heavily in the high jobless rate. Many workers in construction are poor candidates for retraining for jobs in information technology or health care, where prospects are brighter.

A dimmer future for housing is one reason why economists at the International Monetary Fund think a permanently higher unemployment rate is in the cards for American workers.

There is a second dimension to the housing and jobs imbalance. Between one-quarter and one-fifth of all U.S. homeowners are under water — they owe more on their homes than their homes are worth. Under- water homeowners are far less mobile than in past recessions, when they moved in the millions to healthier economies in the Sun Belt. In the 1970s and 1980s, Colorado was a major beneficiary of that exodus from the East Coast and the Midwest.

But job-driven migration may be fading into history. Because people under water in their homes are likely to remain in place, unemployment is likely to be stubbornly high, according to Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis.

A recent article in The Economist suggests the U.S. structural unemployment rate could be 6 percent to 6.75 percent, compared to the 4 percent to 5 percent before the crash of 2008. That is the logical result of a workforce that’s much less mobile and whose skills are less transferable. A less mobile workforce is the second dimension of the Great Reset.

Now let’s consider savings and its opposite cousin — spending. Families and businesses are saving much more of their income and long-term that’s a good thing. But the rapid shift from a so-called “negative savings rate,” or spending more than we were taking in, to about a 6 percent savings rate today is affecting all sectors of the economy including the stock and bond markets.

Consumer spending represented about 70 percent of Gross Domestic Product before the bubble burst in 2008. With savings increasing and taxes likely to do the same in a budget-conscious world, consumer spending will likely settle in at about 60 percent to 62 percent of GDP. This change will last at least until consumers’ home equity and retirement savings have been rebuilt to comfortable levels and may last much longer. This is the third feature of the Great Reset.

Lower consumer spending and higher savings mean slower growth and thus a slower than usual reduction in unemployment from today’s 9.6 percent rate. This, plus the pressure of population growth as young people enter the workforce, means that we are in for several years of sluggish growth compared to the bubble economy that existed before the crash.

There is a potential silver lining to the increase in savings — higher savings rates mean lower interest rates and more capital for private, job-creating investment, if and when investors have confidence in future growth and certainty about future tax increases.

Having been through a mini- version of the Great Reset in the wake of the 1980s S&L debacle, Coloradans who have been around for a while have a picture of what lies ahead.

Housing is going to be a four- to five-year slog, with stagnant pricing before a modest rebound. Public works projects may aid recovery, just as Denver’s new airport and infrastructure improvements did in the early 1990s.

The Great Reset will take time because the changes are so fundamental and the inter-relationship of these factors is complex. Over the next few years a new economic equilibrium will emerge along the lines we have described.

The transition to this new equilibrium will be painful, but at the end our economy could emerge stronger than before.

How we emerge from the Great Reset depends on two things. One is how quickly consumers and businesses accept that the economic changes we are experiencing are truly fundamental. There are signs of progress in this area.

Second is how well government policies respond to these new realities. Here the outlook is gloomy.

The Obama administration has not shown a willingness to be straight with the American people about the depth of the economic transformation we are experiencing. And neither congressional Democrats nor Republicans have offered a set of policies designed to deal with it.

Perhaps this will change after the mid-term elections in November. We might call that the Great Wake-Up.

Henry Dubroff is a writer and entrepreneur. John J. Huggins is chief operating officer of a solar energy company based in Boulder.

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